Manufacture test for packing and labelling activities must be decided before service tax as Business Auxiliary Service applies

Packing, sealing and labelling of oil in factory premises may constitute manufacture where Chapter Note 5 treats packing from bulk to retail packs, labelling or relabelling, and similar treatment making goods marketable as manufacture. The service tax liability under Business Auxiliary Service could not be examined in isolation without first deciding that foundational question. The order was therefore set aside and the matter remanded for de novo adjudication, with directions to determine whether the activity amounted to manufacture before considering service tax; only if it did not amount to manufacture could Business Auxiliary Service apply.

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Issues: (i) Whether the packing, sealing, labelling and related handling of oil in containers amounted to manufacture under the tariff note so as to take the activity outside the scope of Business Auxiliary Service, and whether the service tax demand and penalties could be sustained without examining that aspect.

Analysis: The activity was carried out in the factory premises and involved cleaning empty tins, filling them with oil, sealing and labelling them. Chapter Note 5 of Chapter XV of the Central Excise Tariff Act treats packing from bulk to retail packs, labelling or relabelling, and other treatments making the product marketable as manufacture for the specified goods. The impugned orders had proceeded on the service tax aspect in isolation and had not first examined whether the appellant's activity constituted manufacture. Since that foundational question was material to deciding whether the activity could be taxed as Business Auxiliary Service, the orders could not stand.

Conclusion: The impugned order was unsustainable, was set aside, and the matter was remanded for de novo adjudication after first determining whether the activity amounted to manufacture. Only if it did not amount to manufacture could it be brought within Business Auxiliary Service.

Ratio Decidendi: Where an activity of packing, sealing and labelling in the factory of the manufacturer may amount to manufacture under the tariff note, the authorities must first decide that question before subjecting it to service tax as Business Auxiliary Service.

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